2 Answers

+1 vote

Mortgage lenders allow you to borrow from your 401(k) for a home down payment, and because you are borrowing from yourself, they don't count the 401(k) repayment in your debt-to-income ratios. However, YOU need to consider the payment, because you must be certain that you can afford it.

Many employers allow homebuyers to borrow against the funds in their 401(k) plans. And because you're borrowing from yourself, it can be a less-expensive source of funds. However, this strategy also has a couple of downsides.

First, you can't contribute to the account (your retirement!) while you have a balance against it. If your employer matches contributions, this can be even more costly.

Second, if you lose your job, you typically must repay the loan within 60 days or you get hit with a massive tax bill -- your balance gets taxed as income, plus a 10 percent penalty.

Third, you may find yourself forced to turn down better job opportunities because you can't afford to leave your current job.

Many home buyers borrow against their 401k. The amount withdrawn is not calculated as part of debt to income ratio calculations. How can you owe on money you borrowed from yourself. 60% of face value on 401k is the maximum that can be used.